UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 1-9204
THE PACIFIC LUMBER COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3318327
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
P. O. BOX 37 95565
125 MAIN STREET (Zip Code)
SCOTIA, CALIFORNIA
(Address of Principal
Executive Offices)
Registrant's telephone number, including area code: (707) 764-2222
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding at November 3, 1997: 100
Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
<PAGE>
THE PACIFIC LUMBER COMPANY
INDEX
PART I. - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 1997 and
December 31, 1996 3
Consolidated Statement of Operations for the three
and nine months ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the nine months
ended September 30, 1997 and 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature S-1
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,174 $ 26,027
Receivables:
Trade 12,761 18,080
Other 2,093 2,514
Inventories 67,568 65,690
Prepaid expenses and other current assets 5,707 5,329
------------- -------------
Total current assets 103,303 117,640
Timber and timberlands, net of accumulated
depletion of $234,198 and $221,063,
respectively 321,060 324,986
Property, plant and equipment, net of
accumulated depreciation of $79,598 and
$73,772, respectively 95,707 95,515
Deferred financing costs, net 18,435 20,003
Deferred income taxes 26,979 34,639
Restricted cash 28,818 29,967
Other assets 9,741 6,424
------------- -------------
$ 604,043 $ 629,174
============= =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 4,630 $ 3,765
Accrued compensation and related benefits 10,870 9,673
Accrued interest 7,116 20,211
Deferred income taxes 10,173 10,173
Other accrued liabilities 2,323 2,325
Long-term debt, current maturities 19,428 16,258
------------- -------------
Total current liabilities 54,540 62,405
Long-term debt, less current maturities 543,184 555,596
Other noncurrent liabilities 27,257 25,887
------------- -------------
Total liabilities 624,981 643,888
------------- -------------
Contingencies
Stockholder's deficit:
Common stock, $.01 par value, 100 shares
authorized and issued -- --
Additional capital 157,520 157,520
Accumulated deficit (178,458) (172,234)
------------- -------------
Total stockholder's deficit (20,938) (14,714)
------------- -------------
$ 604,043 $ 629,174
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales:
Lumber and logs $ 59,619 $ 57,522 $ 175,161 $ 168,282
Other 6,973 5,443 20,090 14,885
------------- ------------- ------------- -------------
66,592 62,965 195,251 183,167
------------- ------------- ------------- -------------
Operating expenses:
Cost of goods sold
(exclusive of depletion
and depreciation) 36,397 36,735 107,902 104,605
Selling, general and
administrative expenses 3,196 3,905 9,653 10,731
Depletion and depreciation 6,415 6,910 19,790 20,621
------------- ------------- ------------- -------------
46,008 47,550 137,345 135,957
------------- ------------- ------------- -------------
Operating income 20,584 15,415 57,906 47,210
Other income (expense):
Investment, interest and
other income 711 974 2,201 3,373
Interest expense (13,406) (13,557) (40,242) (40,925)
------------- ------------- ------------- -------------
Income before income taxes 7,889 2,832 19,865 9,658
Provision in lieu of income taxes (3,211) (1,359) (8,089) (4,157)
------------- ------------- ------------- -------------
Net income $ 4,678 $ 1,473 $ 11,776 $ 5,501
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,776 $ 5,501
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and depreciation 19,790 20,621
Amortization of deferred financing
costs 1,568 1,808
Increase (decrease) in cash resulting
from changes in:
Receivables 5,760 7,902
Inventories, net of depletion (1,839) 1,790
Prepaid expenses and other assets (3,695) 1,492
Accounts payable 465 1,111
Accrued and deferred income taxes 7,878 4,080
Accrued interest (13,095) (13,324)
Other liabilities 2,565 (6,867)
Other 161 (335)
------------- -------------
Net cash provided by
operating activities 31,334 23,779
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,164) (8,386)
Net proceeds from sale of assets 84 111
------------- -------------
Net cash used for investing activities (9,080) (8,275)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (18,000) (16,500)
Redemptions, repurchases of and principal
payments on long-term debt (16,256) (14,151)
Restricted cash withdrawals, net 1,149 914
------------- -------------
Net cash used for financing activities (33,107) (29,737)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,853) (14,233)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,027 26,480
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,174 $ 12,247
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 52,054 $ 52,441
Tax allocation payments to MAXXAM Inc. $ 211 $ 300
Income taxes paid $ 166 $ -
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Timber and timberlands acquired subject to
long-term debt $ 7,014 $ -
<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. GENERAL
The information contained in the following notes to the
consolidated financial statements is condensed from that which would appear
in the annual consolidated financial statements; accordingly, the
consolidated financial statements included herein should be reviewed in
conjunction with the consolidated financial statements and related notes
thereto contained in the Annual Report on Form 10-K filed by The Pacific
Lumber Company with the Securities and Exchange Commission for the fiscal
year ended December 31, 1996 (the "Form 10-K"). Any capitalized terms used
but not defined in these Condensed Notes to Consolidated Financial
Statements have the same meaning given to them in the Form 10-K. All
references to the "Company" include The Pacific Lumber Company and its
subsidiary companies unless otherwise noted or the context indicates
otherwise. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end. The results of operations
for the interim periods presented are not necessarily indicative of the
results to be expected for the entire year.
The consolidated financial statements as of and for the periods
ended September 30, 1997 and September 30, 1996 included herein are
unaudited; however, they include all adjustments of a normal recurring
nature which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at September 30, 1997,
the consolidated results of operations for the three and nine months ended
September 30, 1997 and 1996 and consolidated cash flows for the nine months
ended September 30, 1997 and 1996. The Company is an indirect, wholly
owned subsidiary of MGI. MGI is a wholly owned subsidiary of MGHI which is
a wholly owned subsidiary of MAXXAM. Scotia Pacific is a wholly owned
subsidiary of Pacific Lumber.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Lumber $ 42,819 $ 46,882
Logs 24,749 18,808
------------- -------------
$ 67,568 $ 65,690
============= =============
</TABLE>
3. RESTRICTED CASH
Restricted cash represents the amount held by the Trustee under
the indenture governing the Timber Notes of the Company's wholly owned
subsidiary, Scotia Pacific. In addition, cash and cash equivalents include
$7,318 and $17,600 at September 30, 1997 and December 31, 1996,
respectively, which is restricted for debt service payments on the Timber
Notes.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
7.95% Scotia Pacific Timber Collateralized
Notes due July 20, 2015 $ 319,965 $ 336,130
10-1/2% Pacific Lumber Senior Notes due March
1, 2003 235,000 235,000
Revolving Credit Agreement 7,014 -
Other 633 724
------------- -------------
562,612 571,854
Less: current maturities (19,428) (16,258)
------------- -------------
$ 543,184 $ 555,596
============= =============
</TABLE>
On October 9, 1997, the Revolving Credit Agreement was amended
to, among other things, extend the date on which it expires to May 31,
2000.
5. CONTINGENCIES
The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality. Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation. Compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations of the Company, increase its cost of logging
operations. The Company is subject to certain pending matters described
below which could have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. There
can be no assurance that certain pending or future governmental
regulations, legislation, judicial or administrative decisions or
California ballot initiatives will not have a material adverse effect on
the Company.
Regulatory actions and lawsuits are commenced from time to time
seeking to have certain species listed as threatened or endangered under
the ESA and/or the CESA and, in certain instances, to designate critical
habitat for such species. In May 1996, the USFWS published the Final
Designation of critical habitat for the marbled murrelet, a coastal
seabird, which designated over four million acres as critical habitat for
the marbled murrelet. Although nearly all of the designated habitat is
public land, approximately 33,000 acres of the Company's timberlands are
included in the Final Designation, the substantial portion of such acreage
being young growth timberlands. In order to mitigate the impact of the
Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, the Company attempted to develop the Murrelet HCP. Due
to, among other things, the unfavorable response of the USFWS to the
Company's initial Murrelet HCP efforts, the Company and its subsidiaries
filed the Takings Litigation alleging that certain portions of their
timberlands had been "taken" and are seeking just compensation. Pursuant
to the Headwaters Agreement entered into by the Company, MAXXAM, the United
States and California on September 28, 1996 and described in Note 6 below,
the Takings Litigation has been stayed at the request of the parties.
On April 25, 1997, the NMFS announced the listing of the coho
salmon as threatened under the ESA in northern California, including lands
owned by the Company. On October 1, 1997, the Environmental Protection
Information Center, Inc. ("EPIC"), the Sierra Club and others notified the
Company, NMFS and other regulatory agencies of their intent to file suit
against these parties to enjoin an alleged take of the coho salmon within
six watersheds on the Company's timberlands. It is impossible for the
Company to determine the potential adverse effect of the Final Designation,
the listing of the coho salmon and/or any related litigation on the
Company's consolidated financial position, results of operations or
liquidity until such time as various regulatory and legal issues are
resolved; however, if the Company is unable to harvest, or is severely
limited in harvesting, on the affected timberlands, such effect could be
materially adverse to the Company. If the Company is unable to harvest or
is severely limited in harvesting, it intends to seek just compensation from
the appropriate governmental agencies on the grounds that such restrictions
constitute a governmental taking. See Note 6 below for information
regarding the Company's recent submission of a revised draft Multi-Species
HCP pursuant to the Headwaters Agreement.
In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives. These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
Timber companies must submit an SYP demonstrating that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that their projected timber inventory is capable of sustaining
the LTSY harvest level in the last decade of the 100-year planning period.
On December 17, 1996, the Company submitted a proposed SYP to the CDF which
was revised and re-submitted in September 1997. As revised, the proposed
SYP sets forth an LTSY harvest level substantially the same as the
Company's average annual timber harvest over the last six years. The
proposed SYP also indicates that the Company's average annual timber
harvest during the first decade of the SYP would approximate the LTSY
harvest level. During the second decade of the proposed SYP, the Company's
average annual timber harvest would be approximately 10% less than that
proposed for the first decade. The SYP, when approved, will be valid for
ten years. Thereafter, revised SYPs are to be prepared every decade that
will address the LTSY harvest level based upon reassessment of changes in
the resource base and protection of public resources.
The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
will permit the Company to harvest its timberlands (including over the next
two decades a substantial portion of its old growth timberlands not
transferred pursuant to the Headwaters Agreement) to achieve maximum
sustained yield. The SYP is subject to review and approval by the CDF, and
there can be no assurance that the SYP will be approved in its proposed
form. Until the SYP is reviewed and approved, the Company is unable to
predict the impact that these regulations will have on its future timber
harvesting practices. It is possible that the results of the review and
approval process could require the Company to reduce its timber harvest in
future years from the harvest levels set forth in the proposed SYP. The
Company believes it would be able to mitigate the effect of any required
reduction in harvest level by acquisitions of additional timberlands and
making corresponding amendments to the SYP; however, there can be no
assurance that the Company would be able to do so, and the amount of such
acquisitions would be limited by the Company's available financial
resources. The Company is unable to predict the impact the sustained yield
regulations will have on its financial position, results of operations or
liquidity.
Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of the Company's THPs and other timber harvesting
operations, and the Company expects that such groups and individuals will
continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent the Company from implementing certain of
its approved THPs or which challenge other operations by the Company. These
challenges have severely restricted the Company's ability to harvest old
growth timber on its property. To date, challenges with respect to the
Company's THPs relating to young growth timber and to its other operations
have been limited; however, no assurance can be given as to the extent of
such challenges in the future. The Company believes that environmentally
focused challenges to its timber harvesting and other operations are likely
to occur in the future, particularly with respect to virgin and residual
old growth timber. Although such challenges have delayed or prevented the
Company from conducting a portion of its operations, they have not had a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. Nevertheless, it is impossible to
predict the future nature or degree of such challenges or their impact
on the Company's consolidated financial position, results of operations or
liquidity.
The Company is also involved in various claims, lawsuits and
proceedings. While there are uncertainties inherent in the ultimate
outcome of such matters and it is impossible to determine the ultimate
costs that may be incurred, management believes that the resolution of such
uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
6. HEADWATERS AGREEMENT
On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement with the United States and California. The
Headwaters Agreement provides the framework for the acquisition by the
United States and California of approximately 5,600 acres of the Company's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest (collectively, the "Headwaters Timberlands"). A substantial
portion of the Headwaters Timberlands consists of virgin old growth
timberlands. The Headwaters Timberlands would be transferred in exchange
for (a) property and other consideration from the United States and
California having an aggregate fair market value of $300 million, and (b)
approximately 7,755 acres of adjacent timberlands (the "Elk River
Timberlands") to be acquired by the United States and California from a
third party. The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party.
Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands, (b) approval of an SYP (see Note 5) and a Multi-Species HCP
(covering the Resulting Pacific Lumber Timber Property and the timberlands
to be acquired and retained by the United States and California) and
issuance of a Permit, each in form and substance satisfactory to the
Company, (c) the issuance by the Internal Revenue Service and the
California Franchise Tax Board of closing agreements in form and substance
sought by and satisfactory to the Pacific Lumber Parties, (d) the absence
of a judicial decision in any litigation brought by third parties that any
party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal
with prejudice at closing of the Takings Litigation.
As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Springs Forest to
conduct logging operations, including salvage logging (the "Moratorium"). The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the closing conditions to their respective satisfaction. On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend to February 17, 1998 the period of time during which
these closing conditions must be met. No written amendment has been
executed, but the Pacific Lumber Parties have continued to observe the
Moratorium. The extension is subject to the achievement of certain
milestones toward completion of the Headwaters Agreement, including
satisfaction of the Pacific Lumber Parties with the progress of the United
States and California in providing the required consideration.
The U.S. House and Senate have each passed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds toward consummation of the Headwaters Agreement (the "Interior
Appropriations Bill"); however, it is unclear whether President Clinton
will sign the bill. The federal funding is to remain available until March
1, 1999 and is subject to several conditions, including: (a) contribution
by the State of California of its $130 million portion of funding for the
Headwaters Agreement, (b) approval by the State of California of an SYP
covering the Resulting Pacific Lumber Timber Property, (c) dismissal of the
Takings Litigation, (d) issuance by the United States of the Permit, (e)
completion of an appraisal of the lands and interests being acquired by the
United States (the "Appraisal"), (f) completion of an environmental impact
statement with respect to the Multi-Species HCP, and (g) adequate provision
having been made for access to the Headwaters Timberlands. Except for
acquisition of lands necessary for roadway access to the Headwaters
Timberlands, the Interior Appropriations Bill requires specific
Congressional authorization of acquisitions that enlarge the Headwaters
Timberlands by over five acres. The Interior Appropriations Bill also
provides that the acquisition of the Headwaters Timberlands may not be
completed prior to the earlier of (a) 180 days after enactment (extended by
one day for every day beyond 120 days that the Appraisal is not submitted
to Congress), or (b) enactment of any separate authorizing legislation
modifying the Interior Appropriations Bill.
Pacific Lumber submitted a revised draft of the Multi-Species HCP
to the USFWS, NMFS and other agencies in September 1997. The Pacific
Lumber Parties and regulatory agencies have had ongoing discussions
regarding the environmental restrictions to be contained in the Multi-
Species HCP, but significant differences remain between what is being
requested by the regulatory agencies and what the Pacific Lumber Parties
are willing to accept. The Interior Appropriations Bill requires that the
regulatory agencies report to Congress regarding (a) the scientific and
legal standards and criteria under the ESA used to develop the Multi-
Species HCP and the Permit, and (b) should application for the Permit be
denied, the precise substantive rationale for such denial. The Pacific
Lumber Parties believe that this Congressionally-supervised process may
assist the regulatory authorities and the Pacific Lumber Parties to reach
an acceptable Multi-Species HCP, but no assurances can be made in this
regard.
Although California has not enacted legislation providing funds
for its portion of the acquisition contemplated by the Headwaters
Agreement, representatives of the State of California continue to indicate
that they are considering various methods of furnishing the required
consideration.
The parties to the Headwaters Agreement are working to satisfy
the closing conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.
THE PACIFIC LUMBER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the response to
Part I, Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any
capitalized terms used but not defined in this Item have the same meaning
given to them in the Form 10-K.
This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements appear in several places in this Form
10-Q. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will,"
"should," "plans" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements
are not guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in
the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new
or modified statutory or regulatory requirements and changing prices and
market conditions. This section and the Company's Form 10-K identify other
factors that could cause such differences. No assurance can be given that
these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.
RESULTS OF OPERATIONS
The Company is engaged in forest products operations. Its
business is seasonal in that the Company generally experiences lower first
quarter sales due largely to the general decline in construction-related
activity during the winter months. Accordingly, the Company's results for
any one quarter are not necessarily indicative of results to be expected
for the full year. The following table presents selected operational and
financial information for the three and nine months ended September 30,
1997 and 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
(IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
<S> <C> <C> <C> <C>
Shipments:
Lumber: (1)
Redwood upper grades 12.7 12.8 39.0 36.1
Redwood common
grades 34.5 39.2 112.8 120.2
Douglas-fir upper
grades 3.3 2.8 8.3 7.8
Douglas-fir common
grades 22.5 18.8 59.0 56.7
Other 3.9 3.7 11.2 12.0
------------- ------------- ------------- -------------
Total lumber 76.9 77.3 230.3 232.8
============= ============= ============= =============
Logs (2) 11.1 11.3 34.8 37.7
============= ============= ============= =============
Wood chips (3) 59.5 49.3 176.7 141.4
============= ============= ============= =============
Average sales price:
Lumber: (4)
Redwood upper grades $ 1,537 $ 1,368 $ 1,426 $ 1,382
Redwood common
grades 596 555 579 536
Douglas-fir upper
grades 1,243 1,108 1,205 1,138
Douglas-fir common
grades 443 489 473 435
Logs (4) 410 446 392 462
Wood chips (5) 76 78 77 79
Net sales:
Lumber, net of discount $ 55.1 $ 52.5 $ 161.5 $ 150.9
Logs 4.5 5.0 13.7 17.4
Wood chips 4.5 3.9 13.7 11.2
Cogeneration power 1.3 1.1 3.4 2.4
Other 1.2 .5 3.0 1.3
------------- ------------- ------------- -------------
Total net sales $ 66.6 $ 63.0 $ 195.3 $ 183.2
============ ============ ============ ============
Operating income $ 20.6 $ 15.4 $ 57.9 $ 47.2
============ ============ ============ ============
Operating cash flow (6) $ 27.0 $ 22.3 $ 77.7 $ 67.8
============ ============ ============ ============
Income before income taxes $ 7.9 $ 2.8 $ 19.9 $ 9.7
============ ============ ============ ============
Net income $ 4.7 $ 1.5 $ 11.8 $ 5.5
============ ============ ============ ============
<FN>
- ---------------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of
2,400 pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.
(6) Operating income before depletion and depreciation, also referred to
as "EBITDA."
</TABLE>
Net sales
Net sales for the quarter ended September 30, 1997 increased from
the comparable prior year quarter due to higher average realized prices for
common and upper grade redwood lumber, partially offset by lower average
realized prices for common grade Douglas-fir lumber. Overall, the volume
of lumber shipments in the 1997 third quarter was substantially unchanged
from the 1996 third quarter as an increase in shipments of common grade
Douglas-fir lumber offset a decrease in shipments of common grade redwood
lumber. Net sales for the nine months ended September 30, 1997 increased
from the comparable prior year period principally due to higher average
realized prices for most categories of redwood and Douglas-fir lumber. The
improvement due to higher prices was offset somewhat by a decrease in
shipments as lower volumes of common grade redwood lumber more than offset
higher volumes in most other categories of lumber.
Operating income and income before income taxes
Operating income and income before income taxes for the three and
nine months ended September 30, 1997 increased from the comparable prior
year periods, principally due to the increase in net sales discussed above.
FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES
The indentures governing the Timber Notes and the Senior Notes
and the Company's Revolving Credit Agreement contain various covenants
which, among other things, limit the ability of Pacific Lumber and Scotia
Pacific to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. As
of September 30, 1997, under the most restrictive of these covenants,
approximately $14.2 million of dividends could be paid by the Company to
MGI.
As of September 30, 1997, $38.3 million of borrowings was
available under the Revolving Credit Agreement, of which $5.3 million was
available for letters of credit and $23.0 million for timberland
acquisitions. As of September 30, 1997, $7.0 million of borrowings and
$14.7 million in letters of credit were outstanding. On October 9, 1997,
the Revolving Credit Agreement was amended to, among other things, extend
the date on which it expires to May 31, 2000.
As of September 30, 1997, the Company had consolidated long-term
debt of $514.4 million (net of current maturities and restricted cash
deposited in the Liquidity Account) as compared to $525.6 million at
December 31, 1996. The decrease in long-term debt was principally due to
principal payments on the Timber Notes of $16.2 million offset by
borrowings of $7.0 million under the Revolving Credit Agreement. The
Company anticipates that cash from operations, together with existing cash,
cash equivalents and available sources of financing, will be sufficient to
fund its working capital and capital expenditure requirements for the next
year. With respect to its long-term liquidity, the Company believes that
its existing cash and cash equivalents, together with its ability to
generate sufficient cash from operations and to obtain both short- and
long-term financing, should provide sufficient funds to meet its working
capital and capital expenditure requirements. However, due to its highly
leveraged condition, the Company is more sensitive than less leveraged
companies to factors affecting its operations, including governmental
regulation affecting timber harvesting practices, increased competition
from other lumber producers or alternative building products and general
economic conditions.
TRENDS
This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. See above for cautionary information with respect to
such forward-looking statements.
The Company's operations are subject to a variety of California
and federal laws, regulations and judicial and administrative
interpretations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality. Moreover, these laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation. Compliance with such laws, regulations and
judicial and administrative interpretations, together with the cost of
litigation incurred in connection with certain timber harvesting operations
of the Company, increase the cost of logging operations. The Company is
subject to certain pending matters which could have a material adverse
effect on its consolidated financial position, results of operations or
liquidity. There can be no assurance that these pending matters or future
governmental regulations, legislation or judicial or administrative
decisions would not have a material adverse effect on the Company. See
Part II, Item 1. "Legal Proceedings" and Note 5 to the Condensed
Consolidated Financial Statements for further information regarding
regulatory and legal proceedings affecting the Company's operations. See
also Note 6 to the Condensed Consolidated Financial Statements for
information concerning the status of the Headwaters Agreement.
Judicial or regulatory actions adverse to the Company, increased
regulatory delays and inclement weather in northern California,
independently or collectively, could impair the Company's ability to
maintain adequate log inventories and force the Company to temporarily idle
or curtail operations at certain lumber mills from time to time.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Form 10-K for information
concerning material legal proceedings with respect to the Company. The
following material developments have occurred with respect to such legal
proceedings since the date of the Form 10-K. Any capitalized or italicized
terms used but not defined in this Item have the same meaning given to them
in the Form 10-K.
On October 1, 1997, the Environmental Protection Information
Center, Inc. ("EPIC"), the Sierra Club and others notified the Company,
NMFS and other regulatory agencies of their intent to file suit against
these parties to enjoin an alleged take of the coho salmon within six
watersheds on the Company's timberlands.
With respect to the Marbled Murrelet action described under
"Timber Harvesting Litigation" in the Form 10-K, on April 18, 1997, the
U.S. Ninth Circuit Court of Appeals reversed the trial court's decision
which had preliminarily enjoined eight already-approved THPs to the extent
they rely on the Federal Owl Plan. On June 18, 1997, the court granted the
defendants' motions for summary judgment disposing of the remaining issues
in this case in favor of the defendants.
With respect to the Takings Litigation described under "Timber
Harvesting Litigation" in the Form 10-K, the parties have asked the court
to extend the stay of each action until November 14, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
4.1 Second Amendment, dated October 9, 1997, to the
Revolving Credit Agreement
27 Financial Data Schedule
B. REPORTS ON FORM 8-K:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized, who has signed this report on
behalf of the Registrant and as the principal accounting officer of the
Registrant.
THE PACIFIC LUMBER COMPANY
Date: November 5, 1997 By: /S/ GARY L. CLARK
Gary L. Clark
Vice President - Finance and
Administration
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and consolidated statement of operations
and is qualified in its entirety by reference to such consolidated financial
statements together with the related footnotes thereto.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 15,174
<SECURITIES> 0
<RECEIVABLES> 12,761
<ALLOWANCES> 0
<INVENTORY> 67,568
<CURRENT-ASSETS> 103,303
<PP&E> 175,305
<DEPRECIATION> 79,598
<TOTAL-ASSETS> 604,043
<CURRENT-LIABILITIES> 54,540
<BONDS> 562,612
0
0
<COMMON> 0
<OTHER-SE> (20,938)
<TOTAL-LIABILITY-AND-EQUITY> 604,043
<SALES> 195,251
<TOTAL-REVENUES> 195,251
<CGS> 107,902
<TOTAL-COSTS> 107,902
<OTHER-EXPENSES> 29,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,242
<INCOME-PRETAX> 19,865
<INCOME-TAX> 8,089
<INCOME-CONTINUING> 11,776
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,776
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
SECOND AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of October 9, 1997, is entered into by and between
THE PACIFIC LUMBER COMPANY (the "Company") and BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION (the "Bank").
RECITALS
A. The Bank and the Company are parties to an Amended and Restated
Credit Agreement dated as of November 10, 1995 pursuant to which the Bank
has extended certain credit facilities to the Company. This Credit
Agreement, as amended by a First Amendment to Amended and Restated Credit
Agreement dated as of February 10, 1997 and as in effect as of the opening
of business on the date of this Amendment is referred to in this amendment
as the "Credit Agreement".
B. The Company has requested that the Bank agree to certain
amendments of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement as set forth and
subject to the terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto agree as follows:
1. Defined terms. Unless otherwise defined in this Agreement,
capitalized terms shall have the meanings (if any) assigned to them in
the Credit Agreement.
2. Amendments to Article I and II.
(a) Section 1.01 of the Credit Agreement is amended as follows:
(1) The last paragraph of the definition of "Acceptable
Inventory" is amended in its entirety to provide as follows:
"The value of Acceptable Inventory shall be the lesser of
the Company's cost (determined under GAAP) or the Bank's
independent determination of the resale value of such
inventory in such quantities and on such terms as the Bank
may reasonably deem appropriate. Until further written
notice from the Bank to the Company, the Bank agrees that
the value (y) of the lumber component of Acceptable
Inventory shall be determined by the resale value of such
inventory in such quantities and on such terms as the Bank
may reasonably deem appropriate and (z) of the log
component of such Acceptable Inventory shall be determined
by the Company's cost (determined under GAAP) of such
inventory."
(2) Clause (a) of the definition of "Acceptable Receivable" is
amended by deleting "$500,000" in the two places in which
such amount appears and replacing it with "$2,000,000".
(3) Clause (a) of the definition of "Revolving Termination Date"
is amended in its entirety to provide as follows:
"(a) May 31, 2000; and"
(4) Clause (a) of the definition of "Term Credit Termination
Date" is amended in its entirety to provide as follows:
"(a) June 30, 1999; or"
(b) Subsection 2.01(b)(2) of the Credit Agreement is amended in its
entirety to provide as follows:
"(2) After the issuance or amendment of a Standby Letter of
Credit, the aggregate of (y) the Outstanding Letters of Credit
and (z) the Letter of Credit Obligations shall not exceed
$20,000,000."
(c) Subsection 2.08(a) of the Credit Agreement is amended by
replacing "June 30, 1998" in clause (1) and clause (2) of such
subsection with "June 30, 1999".
3. Representations and Warranties. The Company hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Company of this
Amendment have been duly authorized by all necessary corporate
and other action and do not and will not require any registration
with, consent or approval of, notice to or action by, any Person
(including any Governmental Authority) in order to be effective
and enforceable. The Credit Agreement as amended by this
Amendment constitutes the legal, valid and binding obligations of
the Company, enforceable against it in accordance with its
respective terms, without defense, counterclaim or offset.
(c) All representations and warranties of the Company contained in
the Credit Agreement are true and correct.
(d) The Company is entering into this Amendment on the basis of its
own investigation and for its own reasons, without reliance upon
the Bank or any other Person.
4. Effective Date. This Amendment will become effective as of October
9, 1997 (the "Effective Date"); provided that each of the following
conditions precedents is satisfied on or before such date:
(a) The Bank has received from the Company a duly executed original
of this Amendment.
(b) The Bank has received from the Company a copy of a resolution
passed by the board of directors of the Company, certified by the
Secretary or an Assistant Secretary of the Company as being in
full force and effect on the date hereof, authorizing the
execution, delivery and performance of this Amendment.
(c) The Bank has received from counsel to the Company an opinion in
form and substance satisfactory to the Bank stating, among other
matters, that this Amendment and the Credit Agreement as amended
by this Amendment is a legal and binding obligation of the
Company, enforceable against the Company in accordance with its
terms.
(d) All representations and warranties contained herein are true and
correct as of the Effective Date.
5. Miscellaneous.
(a) All terms, covenants and provisions of the Credit Agreement as
amended by this Amendment are and shall remain in full force and
effect and all references therein to such Credit Agreement shall
henceforth refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be deemed incorporated into, and
a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the benefit of
the parties hereto and thereto and their respective successors
and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(d) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same
instrument. Each of the parties hereto understands and agrees
that this document (and any other document required herein) may
be delivered by any party thereto either in the form of an
executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy
original, and that receipt by the Bank of a facsimile transmitted
document purportedly bearing the signature of the Company shall
bind the Company, with the same force and effect as the delivery
of a hard copy original. Any failure by the Bank to receive the
hard copy executed original of such document shall not diminish
the binding effect of receipt of the facsimile transmitted
executed original of such document which hard copy page was not
received by the Bank.
(e) This Amendment may not be amended except in accordance with the
provisions of Section 9.01 of the Credit Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions
of this Amendment or the Credit Agreement, respectively.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the date first above written.
THE PACIFIC LUMBER COMPANY BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION
By: /S/ GARY L. CLARK By: /S/ MICHAEL J. BALOK
Name: Gary L. Clark Name: Michael J. Balok
Title: Vice President--Finance Title: Managing Director
and Administration
